Fannie Mae 5% Down Multifamily Loan: A Double-Edged Sword

[Brian J Allen]

In November 2023, Fannie Mae introduced a new policy allowing owner-occupant loans on 2-4 family homes with just 5% down, a significant change from the previous requirement of a minimum 15% down payment. One might think this would help first-time owner-occupant homebuyers enter the housing market. Unfortunately, it has also served to prop up the housing market just when it was about to slow down.

Before this, the only multifamily low-down payment program available was the FHA loan, which required as little as 3.5% down. One of the key features of the FHA loan was the Self-Sufficiency Test, which helped keep prices in check. This test ensured that 75% of the total monthly rent for the building would cover the mortgage, taxes, and insurance on the property.

For example, consider a three-family property generating $2,000 per floor, totaling $6,000 in rent. The Self-Sufficiency Test would allow 75% of that, or $4,500, to cover monthly expenses. If the property costs $600,000 with a 3.5% down payment at a 7% mortgage rate, along with typical taxes and insurance, the monthly expenses could be around $4,700. In this case, the FHA would not approve the loan, serving as a good check on prices.

However, with the new 5% down Fannie Mae loan, this check and balance is no longer in place. Motivated buyers are now bidding up houses to prices they cannot realistically afford. This has had the dual negative effect of artificially inflating prices and putting buyers in precarious financial positions.

In Worcester, we have seen properties with $6k a month in rent sell for as much as $720k which has directly contributed to a run-up in prices which has priced out most first-time buyers.

While the intention behind the Fannie Mae 5% down program may have been to help first-time homebuyers, it’s essential to consider the broader impact on the housing market and buyer stability. Careful regulation and oversight are needed to ensure that such programs truly benefit those they aim to help without unintended negative consequences.